In 1971 the USA decoupled the dollar from gold. From that day onwards inflation rose rapidly in many parts of the world. Whilst it is perfectly possible to enjoy monetary discipline without a gold standard, the Central Banks and governments of many major countries could not resist the temptation to allow more credit and money to circulate, which led to more inflation.
This tendency was particularly rife at times in the UK, especially in the 1970s. Inflation in the UK since 1971 has averaged a very rapid 6.2%. You would need £12 now to provide the same value as £1 in 1971. The value of money has fallen by a massive 92%.
The rate of fall in our money was brought down from the very high levels of the 1970s, but has remained quite high by international standards. In the last two years inflation has averaged 4.2%, taking the value of our money down by another 8%.
There is little evidence to support the idea that a higher rate of inflation produces more growth. Indeed, the recent inflation has eroded real incomes and made it more difficult to generate a private sector led recovery. When inflation was out of control in the 1970s, the UK economy performed especially badly, with a recession and a trip to the IMF to borrow to keep the country afloat.
Mr Carney the new Governor of the Bank of England may well wish to produce a monetary policy which fosters more growth. He needs to also be aware of the tendency of the UK to too much inflation. I suspect he will wisely decide to keep the inflation target. He should also ask why it has been missed so much in recent years, and ask whether better control of inflation might not be part of the answer to instilling confidence and encouraging more growth.
Dropping the inflation target gives him no freedom he does not enjoy anyway, given the way the Bank has behaved in recent years. It would, however, worry some people in the markets in a way which would be unhelpful. Making it more flexible may be more honest than the present regime has been over the target, but implying it is not being taken seriously at all would also be an unwise move.
February 9, 2013
If only you’d joined the euro! 🙂
(your money would have kept more of its value though)
February 9, 2013
It certainly helped Ireland did it not.
February 9, 2013
Outside the euro, things might have turned out worse for the Irish. It is not for nothing that Ireland wants to remain in the euro, even though I have seen this conservative suggestions for Ireland to leave the euro. I haven’t seen other countries wanting to leave the euro either. All defeating the British predictions of euro collapse and EU collapse.
February 9, 2013
Nonsense, you will be telling us it is helping greatly in Greece, Portugal, Spain & Italy next.
February 10, 2013
Well they would be worse off outside the euro because it would greatly increase their borrowing costs.
February 9, 2013
What the Irish hoped for was large transfer payments from other EU countries (or at least debt forgiveness). Membership of the Euro was purely incidental to that, but has in the end brought the gravy train to an end. Part of the problem was that transfer payments and loans ended up in inflating property prices rather than real and productive investment. Irish investors were also significant in inflating property prices in Portugal and Spain, creating an even bigger pyramid.
This bubble has significantly unwound so far as prices are concerned, but the banking consequences have been temporarily kicked down the road. That is not something that can be maintained indefinitely. Indeed, the longer the Eurozone takes to face its banking demons the greater the damage that will be done when eventually it is no longer possible to keep all the plates spinning.
February 10, 2013
@Mark: “What the Irish hoped for was large transfer payments from other EU countries (or at least debt forgiveness). ”
That doesn’t tally with what I’ve been told by people who live in the ROI, perhaps they move in different circles but had you suggested that of one or more of the Mediterranean member states then I might be a lot more inclined to agree!
February 9, 2013
PvL: “Outside the euro, things might have turned out worse for the Irish.”
Outside the Euro the Irish may well have had to borrow at significantly less favorable rates afforded them by being tied to the German economy. That in turn may well have attenuated the worst aspects of their debit fueled boom.
February 9, 2013
Peter–They might have turned out better too–your statement of the obvious doesn’t add much. They “want to remain” because it is admittedly difficult to leave and it would undoubtedly be embarrassing for them to have to do so. I suspect they like the handouts too, which have nothing to do with the euro per se.
February 10, 2013
@Leslie Singleton: Indeed, and let’s remember that in any case the EU is that popular in the ROI, like many in the UK they want to be members of a loose grouping of separate countries, not a part of a super state – remember that it was only after considerable bullying that the Irish people finally approved the Lisbon Treaty.
February 10, 2013
That is quite wrong. Ireland’s current problem was predicted. Interest rates in Ireland were set for Central European economic conditions. In Ireland the low interest rates led to a house speculation boom – not discouraged by politicians. Prices rocketed in all the countries on the fringes, many of them on the back of misallocation of resources into housing booms.
Had the UK joined the Euro we would have had the same problem, and I for one would have been deep in that trough myself secure in the knowledge that I wasn’t going to be paying 16% interest any time soon.
Low cost of capital is fine for industrial economies, but much of Europe is not industrial. The Euro was certainly not a good idea for a lot of countries.
February 10, 2013
I suspect you are confusing the EU and the Euro – governments want to get free money from the EU and think the only price to pay is being forced to adopt the Euro.
The fact remains that Ireland did join the Euro and, despite the additional financial help the UK provided, have ended up in a very bad situation. What might have happened if they stayed out of it is pure conjecture, not fact.
February 10, 2013
As your own Prime Minister has pointed out, the EU treaties need to be amended so that a country could leave the euro without also having to leave the EU.
February 9, 2013
@PvR: I see that you have totally missed the point (again), even if you are correct in saying that the Euro has kept more of its value (though why then is the GBP stronger than the Euro) this blog would not be about what the new BoE governor might wish to do but what the ECB wants to do…
PvR, there is only one strong economy in the Euro zone, Germany, and that is the real problem that is not only dragging all of Europe down but many of the ROTW economies.
February 9, 2013
“though why then is the GBP stronger than the Euro”.
Really ??? Which dates are you comparing?
– start of the financial crisis (2007) and now?
– introduction of the euro (either 1998 or 2002) and now?
I’m not sure who is missing the point here about sterling losing its value?
February 9, 2013
PvR, You seem to be like the eurocrats in Brussels, in denial, the Euro is toast unless something is done about the PIIGS that are still draining the coffers of the ECB and Bundesbank banks dry and they will be the next targets if JMB etc. really do means that the EU “will do what ever it takes” to save their beloved Euro – the markets are just marking time, if they smell an opportunity they will take it…
February 10, 2013
Given that of the PIIGS only Greece is likely to need more money it’s clear that these countries aren’t draining the ECB dry.
February 11, 2013
@uanime5: The only economy within the PIIGS that is on the way up is Ireland’s, the rest are either moribund or have room to fall further – what is more there are other southern EU member states that could become problems. The EU/ECB did not make that threat, to “Do what ever it takes” for no reason you know…
February 9, 2013
Other Eurozone countries such as Austria, Estonia, Ireland, Luxembourg, Malta, and Slovakia have growing economies.
Source: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00115
February 9, 2013
No we shouldn’t, we’d have bust it in the banking crisis and independent democracy would have had to have been suspended in the UK as it has been in other crisis hit Eurozone countries. But what all EU countries should have done is pursued the 1980s idea of a hard ECU running in parallel with national currencies – no need for the Euro and all its attendent disasters.
February 9, 2013
@Richard1: Maybe your idea would have worked, that is difficult to prove. It is obvious that it was not a particular good idea to create an EMU without the E. Actually, in the very first plans pre-Maastricht this was more or less included, but these Dutch drafts for the Maastricht Treaty were rejected by all other EEC countries in on 30-9-1991, a great Dutch diplomatic failure known over here as “Black Monday”. Even now there is some reluctance to pool more sovereignty, but it will happen.
February 9, 2013
Richard–I was trying to revive the idea of the hard ecu in these comments last year but without any support. I believe, but am not certain, that JR used to support the idea but he made clear that he no longer does. He gave no reasons.
February 9, 2013
I agree. The best option is to have sound non-inflatable currency , failing that the next best is to have currency union preventing countries from competitive currency debasement. The worst option is multiple inflating currencies. A race to the bottom.
Germany grew itself from utter post war devastation using the strongest most stable currency in the world, the d-mark. That was no fluke.
February 9, 2013
Garry I thing you meant that the DM became the strongest currency in the world?… What Germany did do though, and here is the problem for today’s Euro and ECB, is that they made dammed sure that the scourge of inflation would never again affect (W) Germany in the way it did in the 1920, this is now so engrained in the very fabric of life that even when inflation would help the Euro crisis (by weakening it) German politicains keeps saying No way!
February 9, 2013
Doesn’t this chart suggest to you that even trying to peg sterling to the euro would be flying in the face of nature?
http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-gbp.en.html
As for merging the two currencies, that would be an act of madness.
February 9, 2013
“Flying in the face of nature” is rather a speciality of governments, the state sector and the BBC. Wind farms, photo-voltaics, daft employments laws, transfers to the feckless, the global warming religion, gender neutral insurance laws, tax rates above about 40%, HS train “investments”, the green deal, green jobs ………….
They do not care what they do so long as they can get a budget to play with. Just as happy putting red traffic light, bike lanes and speed humps in as they will be taking them out.
February 9, 2013
I think you are right to point out that, at least in theory, if we had kept to the German style discipline required to stay within the Euro we would not have had the opportunity to debase the currency.
It is unfortunate that we do not have that kind of discipline in the UK. I wish we did.
A strict monetarist may well have welcomed adoption of the Euro by the UK and the political union this would have required. However, the wider picture is that we have a continent of very different cultures where our priorities differ widely.
No, we are not Germany, Greece is not Germany. We are not Greece. It is for this reason that the Euro is not right for us and not right for Greece and not right for Germany.
It is not right for Europe and this is being proved with the disastrous unemployment in many parts of the continent.
February 9, 2013
I think that a little (or a modicum as its proponents might say) inflation is like being a little bit pregnant and if current theories reckon that some (2% per annum comes to mind for some reason) inflation is a good or necessary thing I think that, like a lot of Economics, they are wrong. There are few unarguable certainties in the world but to my mind one is that the value of money (Did I not learn once that money is a store of value?) should be kept constant.
February 9, 2013
Well said. The best rate of inflation is 0%. 2% is used to “boil the frog slowly” so that hopefully the theft from savers may pass unnoticed.
February 9, 2013
Poor chap! He is earning far too much and people will have far too high expectations, and that could make his do something silly.
Like Fred the Shred.
February 10, 2013
Well he will be earning rather less that the subsidies for a few (or even one perhaps) pointless wind turbines.
February 9, 2013
John I would like to make three points;
It might be a little unfair to cite the lack of the Gold Standard since 1971 for any increase in inflation, both the Tory and Labour manifestos for the 1970 general election mention its perils, the Tory’s saying this about it; “Britain now faces the worst inflation for twenty years. This is mainly the result of tax increases and devaluation. In implementing all our policies, the need to curb inflation will come first. For only then can our broader strategy succeed. “ – obviously inflation was around before the abandonment of the Gold Standard by the USA.
I think it is a very simplistic argument to say that the jump in inflation in the early to mid 1970s was caused simply by excess borrowing by governments (or even companies and individuals), the oil price shocks of that period also played a very important role. Indeed it might be argued that these oil price shocks caused an inflationary vortex, prices went up, wages followed, both of which caused inflation which this in turn caused another cycle of price/wage/inflation increases to start over and so on.
If inflation is so bad, why was it allowed to run at (annual) 13.58% for 1980 and 10.35% for 1981 and then well above the current the BoE/government target or actual rate for all but one other year in the 1980s – again your arguments might appear a little to simplistic or an admission, to use a ‘modernism’, that the 1980s recession was indeed “made in Downing street”! Or could it be that, and this goes to the heart of what Mr Carney seems to be saying, that inflation can be used as a tool to fight economic problems and hence why we need to have a debate – not simply use accepted or current political dogma to set another “Gold Standard” that doesn’t do what was intended.
February 9, 2013
Inflationary growth is a chimera……..The only ‘good’ thing about it is that it reduces outstanding debts which, in most cases, is the mortgage. Unfortunately, this house fuelled economy diverts resources for productive industry. The only real growth is non inflationary, and achieved through efficiency, improved machinery, skills, and productivity.
It cannot be coincidence that societies often fall soon after the effects of inflationary policies (with supposed good intentions) are let loose…….
zorro
February 9, 2013
“obviously inflation was around before the abandonment of the Gold Standard by the USA”
It was and that is why the USA defaulted on the gold standard. The price for inflation under the gold standard is to owe more gold and the USA owed so much gold they couldn’t or wouldn’t pay, so they defaulted. The gold standard never fails, countries fail and abandon it due to their own fiscal indiscipline and resulting inability to pay their creditors with sound money. They choose instead to cheat and pay with devalued paper.
The oil shock was a short episode in the early 70’s , fiat currencies have continued to fall up until today. The fall is accelerating. Note how the supply of money started accelerating around 1971 :
http://mises.org/content/nofed/chart.aspx
The effects on prices are currently all in the sovereign bond prices. eg. The largest bond bubble inflated in gilts for 300 years. When that unwinds the effects will be seen more in the general economy and may even lead to hyperinflation or currency repudiation.
February 9, 2013
@Garry: We are still living with the oil shock, prices never went down, when OPEC realised that the west relied on their oil prices were only ever going to go one way – up.
February 9, 2013
The seventies oil shock was a real shock, queues at stations, severe speed limit restrictions. Chaos.
The ongoing rising price of oil is yet another testament to the effects of monetary inflation. Monetary Inflation is never any good.
February 9, 2013
OPEC had effective control of price from the early 1970s until roughly the end of the 1984 UK miners’ strike. After that, increasing quantities of oil were supplied at varying and increasing discounts to official OPEC (and BNOC) prices. OPEC prices were famously described by Oteiba, Oil Minister for the UAE, as “like churches, nice to look at but no longer relevant” in 1986 after the OPEC cartel had collapsed in a price war with pricing based on guaranteeing a margin to refiners who bought their oil: I recall Saudi Arabian Heavy oil selling for as little as just over 4 $/bbl at that time. That compares with prices of 45 $/bbl during the worst of the Iran/Iraq War.
Oil prices largely remained low (under 20 $/bbl) with the exception of the spike caused by Saddam’s Kuwait invasion until after Chavez came to power in Venezuela. He managed to agree with the Saudis and Iranians to bring a halt to their price war fought by securing market share.
There is a more detailed history here:
http://www.wtrg.com/prices.htm
Note the charts are in 2010 dollars at that link.
February 9, 2013
Jerry: “when OPEC realised that the west relied on their oil prices were only ever going to go one way”
There is something to be said for the idea that the West was getting a preferential price for OPEC oil.
But look at the dollar ( or sterling ) price of another commodity – gold.
1972 $43.72
1982 $399.00
1992 $351.00
2002 $278.00
2012 $1590.00
That sure looks like a trend to me. But each of those prices bought only one oz of gold.
I am sure there are other factors that contribute to the price of gold as well as dollar depreciation.
February 10, 2013
@APL: The west was getting a market rate for oil before late 1973, the embargo was caused by OPEC using oil as a weapon against the USA’s support of Israel, when oil prices went through the roof OPEC realised that they could demand a higher price by limiting supply!
As for the gold prices you cite, I think they don’t actually prove that much with regards the effect of the USA leaving gold standard in 1971, what is your ‘base point’, how much did gold cost before…
Then what might have also caused people to rush for gold in 1982, again in 1992, then 2001, and again in 2012? Yes it could be a continuing post gold standard trend but those years could have seen spikes due to (in the same order) the actions of the USSR in Afghanistan and the resultant escalation of the Cold War, the first Iraq war, the Sept 11 attacks, and now the west’s banking/economic crisis.
As well as the 1971 price, do you have the figures for say 1969, 1972 and 1973, the gold prices for these years will do more to show if there was the suggested trend as I would expect to see a spike in both 1972 and ’73 (the latter being before the full effects of OPEC oil shock)?
February 9, 2013
There were two distinct oil shocks,the first c1984-5 and the second 1979-80 or there abouts. Another factor in the second half of the 1970s was the emergence of the eurodollar market, the build up of huge financial surpluse in the oil producers and a financial bubble that then burst causing significant damagee from Mexico to Africa and in Europe in the early 1980s.
February 9, 2013
Indeed 4% inflation halves the value of money in about 17 years. So buying real assets, with borrowed money (on a low capped or fixed rate) looks like a good bet against sound money to me. Especially with Cameron in office and Labour in 2015. Governments just see inflation, in effect as another tax, and a way to devalue their debts.
I see that that the Swiss frank is heading for about 3 times the value it used to be against the £1 when I first went on holiday there. Still we would not want to become a greater Switzerland would we.
A graph of inflation over the last 12 years show it going climbing from about 1% to about 4% is on the link below.
http://monkeywithapin.com/next-book-from-pete-comley/
February 9, 2013
As Warren Buffett said recently about the US.
If I had a way of buying a couple hundred thousand single-family homes… I would load up on them. And I would take mortgages out on them at very low rates…
It’s a way in effect to (bet against) the dollar.
The same surely applies in the UK especially with the increasing population planned by the government, the shortage of land and the high building cost and over regulation of building and planning.
February 9, 2013
This may work in the US but no longer in the UK, since Gordon Brown took away the inflation allowance for CG tax.
For example..
Buy an asset in 1971, value £20,000
Sell it in 2013 value £240,000 assuming it keeps up with general inflation as a typical house.
Profit £220,000
Sales costs including fees
and duty £20,000
Net taxable gain £200,000 @28%
Tax £56,000
Balance left £144,000
Value at 1971 prices £12,000 Loss £8,000
Lost value at 2013 prices £96,000
Lesson. Do not keep any investment for long. Never trust a government. Spend it and claim benefits when you are old. Or move abroad. Even France has inflation allowances.
February 9, 2013
I have never thought that one would work. The Land Registry knows who owns what and where so HMRC can come along and tax you accordingly or the local commissar can tell you where you can shove your deed of title as he requisitions your homes for the homeless.
Surely by now the establishment realises their neo lib economic experiment has blown up in their faces. So it cannot be too long before capital controls start to return. So while you have the opportunity buy your productive assets assets now outside of the UK in jurisdictions where the rule of law still applies e.g Singapore
February 9, 2013
There is certainly the danger of theft by the state or rent controls which are the same thing. Especially with Labour in soon.
February 9, 2013
@Lifelogic: “There is certainly the danger of theft by the state or rent controls which are the same thing.”
Rent controls are not theft, excessive rents for poor and scarce accommodation is the real theft – why do I get the impression that Lifelogoc would quite like to see the return of “Rackmanism” ? 🙁
February 10, 2013
Jerry of course rent controls are theft – you are forcing people to accept less than market value for their asset. Theft pure and simple.
Just the same if as if I forced you to sell or rent out your car, labour or TV to someone at half price. You also kill dead the supply of rented houses.
The solution is more build more houses or have fewer people needing them. Relax planning and building regulations and restrictions and reduce taxes so people can afford to buy and build them.
February 10, 2013
The problem is that a lot of the ones against building more property such as council houses are property owners who do not want to pay any tax.
February 10, 2013
Lifelogic, as I said, you seem to wish for a return of “Rackmanism”… 🙁 🙁
But if rent controls are wrong then yes I agree, the solution is to build more, that is build more socail housing, either in the charitable or LA sector, then let at market rates [1]. This will force a return of proper market forces rather than the current lopsided affair that we have at present which is unduly biased towards the wishes of the landlord. Also Lifelogic, telling someone on a low wage that they should buy a property is only going to create the same flaws and pressures in the banking and finance industries as happen before. This sort of cycle has to be broken once and for all, no return to 110% mortgages etc.
[1] no subsidies, but simple fair rents for the style, location and condition of the property. If the private landlord wishes to charge a higher rent then they need to supply a superior product
February 9, 2013
Nina – More to the point, what about the debased money that Lifelogic’s tenants would be paying the rent of his property portfolio with ?
Who will be able to afford to buy houses at the bottom rung to enable Lifelogic’s eventual realisation of the value of his assets ?
February 10, 2013
At the moment the main buyers are people who are nondom and/or have earned their money abroad in lower tax areas it seems.
February 10, 2013
Or they are criminals and gangsters or the lower taxed areas might be poor third world countries with little or no infrastructure and an inability to tackle large multinational tax evasion to improve their lot. They are in effect being plundered. They are then coming here and pushing up the price of property and adding little to the country as they are in effect bolt holes like holiday homes.
Are you able to understand this lifelogic or is this all not true and not happening?
February 10, 2013
Do not reply any further with any with any BBC green think and wind farm nonsense after this liflogic.
February 11, 2013
@Nina Andreeva: “Surely by now the establishment realises their neo lib economic experiment has blown up in their faces.”
Indeed many might well soon be arguing that it is the experiment in “Monetarism” that has failed. Perhaps we need a return to the stable post war Keynesian economics with a bit of (so called) ‘Socialism’ thrown in, after all even the Tories were broadly wedded to both the need for a planed economy and John Maynard Keynes in the 1950s when we “never had it so good” – or so we were told…
February 9, 2013
You have still got to maintain the property and pay council tax/standing charges. Not to mention the cost of servicing the loan. The price of property has steadily risen over the last fifty years. this is true. However it’s the the times when it does not rise that is expensive. As for buying property in foreign countries the laws are often very different to here with currency fluctuations that could go against you. Singapore (democracy is not like the west’s-ed). That flat might turn out to be a price of sky. Fill ya boots..
February 9, 2013
In the USA their property bubble (which was never anywhere near so big as ours) has largely unwound. Ours remains close to peak values except in Northern Ireland, where prices have halved. I don’t think Buffet would recommend loading up on UK property. Overcrowding is no guarantee of better property prices: indeed, the risk is that tiny properties become almost worthless slums.
February 10, 2013
There is good value in the UK now is many areas. London is picking up strongly, mainly from nondoms and returners with cash and also from the weak pound. Just extend the Nondom rules to UK dom too. But we have Osborne increasing IHT again today it seems in direct breach or his promise.
If you do it with cheap, borrowed but devaluing sterling and pick well – assuming you have find a cheap lender.
February 10, 2013
Buying a large sum investment over a long term is not advisable in the UK. The removal of inflation allowance by G.Brown has had a drastic effect. Using the figures of x12 over 42 years given by JR, the effect would be as follows. Please correct if wrong.
Buy in 1971 @ £20,000
Sell in 2013@ £240,000
Profit £220,000
Sales and duty £20,000
Net taxable £200,000 @28%
CGT £56,000
Balance £144,000
Value 1971 £12,000
Loss 1971 £8,000
Loss 2013 £96,000
IE. If the money had been spent on someting untaxable it would have been worth it’s value and used. By saving it, the real value is lost.
February 11, 2013
Posted after long delay in first effort. Thought it had disappeared into cyberspace.
February 9, 2013
@Lifelogic: “I see that that the Swiss frank is heading for about 3 times the value it used to be against the £1 when I first went on holiday there. Still we would not want to become a greater Switzerland would we.”
I’m not sure we would, you seem to be happily glossing over the fact that the Swiss have their own economic problems caused purely by the strength of the Swiss frank.
That is not to say that a Swiss (or even Monaco) style economy -and society- would not be better than were the UK is currently!
February 9, 2013
Well GDP at 130% of the UK and no real debt or deficit problems looks quite attractive to me but not Cameron and Osborne it seems.
February 9, 2013
@Lifelogic: Look out for low flying, over valued, Swiss franks LL…! What do you not understand about the fact that a currency can be to strong for its and the nations long term good?
GDP and zero debt is not everything, if your currency is to far out of balance (with the ROTW) you will either have problems with imports or exports, depending which way the currency has gone.
February 9, 2013
Mr Cameron would certainly not like that…..being like Switzerland I mean.
zorro
February 9, 2013
Lifelogic: “Still we would not want to become a greater Switzerland would we.”
Ho ho, LL very droll.
Why do politicians talk such rubbish?
February 9, 2013
Your observation that the start of the inflation explosion started with the decoupling of fiat currency from gold is correct imo. The question then is why bother continuing down this path if it has proved such a failure to preserve the spending power of the currency ?
Surely the answer is to take away the power to print fiat money from anyone, they cannot be trusted , and get back to gold, or some other sound money that cannot be printed ?
And pre-empting the inevitable “how do we grow the money supply with gold ?” I wrote this somewhere else :
In a full reserve banking
system using a sound currency such as gold , where no new money is created
elastically, ie printed or
counterfeited, the new
money arises from the
dividing down of existing
units, thus preserving the
value of existing units in a
non-inflationary money
expansion.
As the economy grows the
demand for money
increases and so each unit
of currency increases in
value, reflected by the
increase in the amount of
goods and services a unit
can lay claim to. To be
trivial, assuming a linear
relationship, if the
economy doubles the
value of a unit of fixed
quantity existing currency
doubles. Then you can
divide each unit in half
and now you have
effectively doubled the
supply of money, with each
sub-unit now having the
value of the old unit. A
person who had saved one
old unit now commands
twice the value that he
could before the economy
doubled. Deflation in a
positive sustainable way
from spontaneous market
demand for coin sub-units.
No official decree involved.
After all, this reflects how
the economy naturally
works as each widget , over
time, can be produced
more cheaply due to
innovation and efficiency
improvements and so you
get a slow natural
deflation.
If you want to see a
modern blueprint of a
non-inflating currency in
action, see Bitcoins. Each
Bitcoin can be divided
down by 10^8(each bitcoin
has 8 decimal places). So
while only 21 million
bitcoins will ever be
created, the actual amount
of money that can be
created, by dividing down,
is 21millionx10^8. That is
2,100,000,000,000,000
sub-units of currency,
without any inflation.
February 9, 2013
@Gary: So why did (annual) inflation only jump to 11.03% in 1974 and then run at above 5% until 1983? Before then it seems to have been the UK’s own currency crisis of the late 1960s that was the trigger of our mini inflationary explosion of the period this was all well before the actions of the USA in 1971.
BTW, the source for my cited figures can be found here.
February 9, 2013
Jerry: “So why did (annual) inflation only jump to 11.03% in 1974 and then run at above 5% until 1983?”
1. OPEC oil embargo?
2. Price of oil denominated in dollars which were being devalued.
February 9, 2013
Sorry everyone -slaps head- dammed Google, searched for UK got USA inflation rates (that will teach me not to double check)! 🙁
But that said, I think the figures I quoted above and in another comment are still interesting as it clearly does show that it was the events of 1974 and the OPEC oil embargo, not the day-facto end of the Gold Standard and dollar devaluation. Having now found the UK figures for the period they broadly followed the same suggested trend as I implied although far worse, again there seems to have been a mini spike due to the UK’s own devaluation of 1967 but a far higher spike in 1974/75 and only retuned to single figures once the economic slow down and restructuring of the early 1980s started to bite;
1988 4.90%
1987 4.20%
1986 3.40%
1985 6.10%
1984 5.00%
1983 4.60%
1982 8.60%
1981 11.90%
1980 18.00%
1979 13.40%
1978 8.30%
1977 15.80%
1976 16.50%
1975 24.20%
1974 16.00%
1973 9.20%
1972 7.10%
1971 9.40%
1970 6.40%
1969 5.40%
1968 4.70%
1967 2.50%
1966 3.90%
February 9, 2013
The people who have the power to control the level of inflation all have extremely generous index-linked pensions and no doubt their savings and investments are also nicely tucked away either in inflation-proofed funds or in currencies that are not susceptible to inflation, like the Swiss Franc. Furthermore, these people will often be heavily invested in property, which is traditionally an excellent hedge against inflation, and will probably have large mortgages costing barely anything in terms of real interest. As a friend who was one of the founders of Accenture once said, inflation is a wonderful way for wealthy executives to relieve struggling pensioners of their life savings. So the only reason that those in charge would be concerned about high inflation is if they felt a sense of moral outrage at what has been done, and what is still being done very day, to savers and those on fixed incomes. Evidently, for all their grandstanding on other social issues, the ongoing government-sanctioned theft of people’s savings and retirements by inflation is blessed by everyone from Mervyn King and the MPC to George Osborne and David Cameron.
February 9, 2013
Exactly.
February 9, 2013
It is one of the biggest conceits of Willets’ book, “The Pinch” that he ignores this siphoning of assets from the baby boomer generation.
February 9, 2013
I agree, it sucks out the power of your income so you can buy less whilst salary rates just cannot keep up.
Would it not help inflation if the UK could somehow cut out the reams of red tape by quitting the EU thereby becoming more competitive, getting lower energy prices by more Nuclear Power + Shale gas (as you have alluded to before) and seek its own free trade markets which the EU does not currently have?
Or am I dreaming in cuckoo land?
The over reliance on consumerism is always going to make the UK susceptible to inflation if we don’t make enough of it ourselves or export more to counter the balance of imports.
February 9, 2013
@Peter Davies: “Or am I dreaming in cuckoo land?”
I think you might be, as laudable as all you mention you fail to acknowledge one important fact, inflation isn’t an invention of the EU, it existed well before the EU and before the UK joined the then EEC.
As for energy prices, we could cut our energy prices even without nuclear or shale, simply do ways with green taxes and properly regulate the industry, free market thinking doesn’t like nationalisation but it can not be deigned that if gas was bought and stored by a single buyer a even better price could be obtained – this is no different to why a big supermarket chains can buy their beaked beans at a better price that can the smaller chains never mind corner shop.
“The over reliance on consumerism is always going to make the UK susceptible to inflation if we don’t make enough of it ourselves or export more to counter the balance of imports.”
And there lies any number of of the UK’s problems, how many times do we hear people reminiscing about the ‘good old times’ (of only 40 to 50 years ago, I might add) by saying “We never had much but we had what we needed”?
The one think leaving the EU would allow the UK government to do is to tell the British consumer to Buy British – or at least buy in a way that is the best for Britain! At the moment we have to accept imports from countries that will undermine our own economy simply because the EU says so.
February 9, 2013
I think there is already an implication that it isn’t being taken seriously. The goalposts have moved anyway; six years ago interest rates were always moved up in response to increased inflation and now they are not. Our saviour is that the economy is so flat that it doesn’t make a major difference-there is little demand-pull inflation. Surely the minute some artificial demand is created by massive money-printing, inflation will take off and destroy the lives/savings of ordinary folk anyway?
There is no god-given reason why we need this artificial growth in our standard of living-why not accept that we live at this standard or slightly below, and cut government spending appropriately?
February 9, 2013
The fact that banks would not be able to control their lending in this scenario is a very real risk based on past performance. I also have doubts about the banks ability to wind back QE effectively (if they have that real intention)…….
zorro
February 9, 2013
@JimF: “There is no god-given reason why we need this artificial growth in our standard of living-why not accept that we live at this standard or slightly below, and cut government spending appropriately?”
And there lies the rub, what should be cut, there are obvious examples (that only the politically correct will complain about) such as ‘green’ subsidies or overseas aid but then what, and what might the unintended consequences be, do the wrong thing and a slow down becomes stagnation which might then cause even greater inflationary pressures as politicos start to panic.
East to say, cut government spending, not always so easy to carry out I fear.
February 9, 2013
JimF: “this artificial growth”
That is the issue.
Organic growth in the economy doesn’t conform to the electoral cycle. Politicians spend today’s money yesterday to win elections. Now it’s come time to pay.
February 9, 2013
You’re making a mountain out of a mole hill.
Just start with housing benefit, long promised and not delivered, which would have a good knock-on effect in deflating house prices.
Then move on to allocating welfare resources more selectively to those that have either worked here or are born to folk who have worked here and paid the insurance premiums.
Then move on to public sector non-jobs and chop (approx 50% of all).
I think we’d be there!
February 9, 2013
@JimF: “Just start with housing benefit, long promised and not delivered, which would have a good knock-on effect in deflating house prices.”
Well that’s the cause/excuse for the next riots sorted then! This is exactly what I meant by unintended consequences, so just what will the panicked reaction be from the politicos to such an occurrence, frantic back-peddling -like after the Pole Tax riots, or having to spend all and more of the saved money on building/hiring more prison space, plus the cost of keeping these otherwise homeless people in prison…
The only two ways to reduce rent/housing benefits costs is to increase the supply, building either more private rented/socail housing, or introducing rent controls, simply cutting housing benefit just puts people on the streets when there is someone on the Agents waiting list to move straight in, especially if they are either paying their own rent (perhaps even prepared to ‘over-occupy’ and thus sharing the current level of, high, rent with their co-tenants).
I also suspect that, like so many Daily Maul readers and the like, you are totally over playing the cost of benefits given to migrant labour etc, I’m not saying that there isn’t a cost, just that any savings might bot be as much as the writers in the Daily Maul think.
February 9, 2013
In many ways the growth in the standard of living is an illusion. I think that it has been stalled for some years now.
Products are cheaper ?
Their quality often shows it.
How long do lightbulbs last nowadays ? Today I’ve had to replace a light switch that barely lasted two years. In eight years I’ve replaced the doorbell three times. How many matches does one have to strike before finding one that will light the BBQ ?
February 9, 2013
You are right to warn of the dangers of being blase about inflation. Too many commentators talk about it as though it is something that is beneficial with little harm. Your statistics show the cruel fallacy of that argument, particularly for those on fixed incomes. Furthermore, as you say there has been a tendency towards too much inflation in the UK and it can get out of control with even more catastrophic consequences. Those of us who experienced the horrors of the 1970s don’t want a repeat of those days. People, today, benefitting from their low mortgae rates, would do well to be warned that such rates were unheard of then but anything from 8% to 15% were the norm for decades.
February 9, 2013
JR: “From that day onwards inflation rose rapidly in many parts of the world.”
Coupled with the explosion in credit (in reality debt), which we are seeing the poison fruit now.
But this served the purposes of the politicians, they wanted to make everyone feel richer because dealing with the underlying problems of the economy would have, in the short term proved electorally unpopular.
February 9, 2013
Ah yes 1971, the year I got married, how well I remember how hard both myself and my wife had worked for the previous 2-3 years to save up the deposit for our first house purchase.
When eventually purchased we had two deck chairs in the lounge, a second hand bed given from a family member in the bedroom, and we were able to purchase a second hand black and white TV after a couple of months.
No, I am not suggesting this was (or should be) the way forward for everyone, but it taught us value for money, which has stayed with us all of our married lives.
No 125% loans then at 6-12 times salary or self certified earnings, you had to save with a Building Society for a minimum of 2 years before they would consider even offering you a loan, then it would be based on 2-3 times joint income maximum (showing a payslip to prove it), and was at the time at an 8% interest rate.
This seems high by todays standards, but wage rises were also reasonable at the time, so you felt like you were keeping up, although perhaps you were not.
The biggest difference then, was jobs were about, if you did not like where you were working, you could move and get another job almost the same day.
No idea about the level of benefits then, as everyone I knew was working and wanted to work.
Not a single school lever from my year at school (Secondary Modern) failed to get a job of one sort or another..
So where has it all gone wrong ?
We no longer have millions of semi, and low skilled manufacturing jobs about.
How well I remember thousands of workers pouring out of factories along the The Great West Road in Brentford at 5.00 oclock in the evening, either walking, cycling or catching buses and trains home. (note few cars).
Our population has grown by a massive amount, due in part to immigration.
Automation and the demise of manufacturing has reduced jobs.
The must have to work culture of many people has reduced, and been replaced by some with, why should I bother.
The number and amount of Benefits have risen.
The savings culture (for a rainy day) has reduced.
The value of savings interest , the return on investment and pensions has been poor.
We have had successive governments who have bribed people with their own money, with increasing unfunded benefits, and suggesting/promising that their way of life will always improve (things can only get better springs to mind).
The fact of the matter is we are now having to compete with many more Countries who are growing some of the jobs we have lost, and so there is no guarantee that “things can only get better” indeed it is more the case that things will only get worse as we become less competitive, as the years drag on.
Our Politicians have to recognise the above, as well as the people, and adjust expectation accordingly.
February 9, 2013
Thye alternative is to grasp the nettle, recognise that we have to become competitive again to survive.
There are many ways of doing this:
Reduce all fuel costs.
Reduce Regulations and red tape.
Have a Tax system that encourages and rewards hard work.
Have a Tax system that encourages Self Employment.
Have a Tax system that encourages real re investment of profit.
Have a Benefits system that is simple, honest and works as a safety net.
Have a severe immigration policy.
Have flexible but simple employment laws.
You will notice all of the above are in the hands of politicians, so to that I would add that no government should be able to borrow money in the peoples names, other than in the case of WAR when needed to defend our own islands.
Thus the simple policy mantra that I have been posting for the past few years.
That Government expenditure should be limited to only 80% of the known tax take of the previous year, should ensure no more borrowing.
February 9, 2013
I remember, years ago, talking to a guy from the stockbrokers Barclays deZoot Web (I think that was their name) who was an expert on currency values. As he said the £ in 1914 had exactly the same value as on the day Napoleon surrendered his sword at Waterloo in 1815. The management of the Bank of England had maintained the value of the currency. When we chatted in the late 1990s the value of that 1815/1914 pound was just 2 pence. That is how the political class have debased the coinage. In Germany and France, and many other European countries, they have actually destroyed the currency.
February 9, 2013
Andy, do politicians cause inflation or do they react to it, my over riding memory of the 1970s was that the politicains (from both sides) were pleading management and unions to modify their expectations/demands – are we, the “Plebs”, simply blaming politicains for our own greed?
February 9, 2013
Money certainly has fallen precipitously in value, and I can find no real counter in economic growth over that period……
zorro
February 9, 2013
(refers to a site I have not checked-ed)
In other words Carney is no Volcker so just expect more of the same and plan your family’s finances accordingly!
February 9, 2013
I do not believe monetary policy can produce growth. Growth is a factor of increasing land, labour, investment and by far the most important, technological improvement. Monetary policy can reduce investor confidence and distort market signals eother reducing some of these factors or giving thec wrong market sugnals which cause them to be used inefficiently. For example the Depression was agravated by a reductuin in monetary supply which induced Keynes to say, correctly, that the opposite policy was needed short term.
There are many things government could do to stimulate growth, most obviously stop preventing the use of new technologies (& sometimes not so new like nuclear & GM). For ideological reasons all the Luddite main parties (ie not UKIP) are actively opposing such growth.
February 9, 2013
Governments and anyone with large borrowings love inflation as it reduces the value of what they owe. At the same time, until recently, everyone got pay increases (whether merited or not) broadly in line with inflation, so they all felt better off.
And my socialist friend would argue that (Tory) governments also like it because it prevents anyone accumulating significant savings which might allow the Plebs to rise above their proper station in life! I’m beginning to think that his view might have some merit with this government with inflation and minimal interest rates on savings.
Don’t expect any changes from the Bank.
February 9, 2013
The consistent error seems to be the belief that central banks fiddling with the price of money is the solution to economic problems. Presumably Mr Carney is not allowed to suggest other policy changes to get better growth – such as cuts in govt expenditure in all the wasteful areas identified so often on this site and elsewhere, and lower taxes.
February 9, 2013
There is only one type of monetary inflation and that is over supply of currency that lowers the value of the currency and causes prices to rise irrespective of any other demand and supply. Demand pull or any other reason given for prices to rise is due to changes in demand and supply of goods and services themselves irrespective of the currency value.
The reason why inflation destroys an economy is that prices are the guide to investment and when prices are moved not only by demand and supply of the goods and services , but also by the fall in the value of the currency, then investment is misguided and mis-allocated and the economy becomes moribund.
Inflation masks real demand and supply pricing.
February 9, 2013
The chancellor seems to have lost his way; any savings in government expenditure are being snaffled up by welfare payments.
On the issue of being competitive in the global marketplace, putting up taxes seems to be the wrong way to go.
If the new governor of the Bank of England takes a more laid back approach to inflation and continues with QE, the pound will fall out of bed…again.
Our balance of payments is so poor, because we don’t have enough quality goods to capture our home markets and not enough for export markets.
Drop CT to the lowest in the EU and reduce employers NI for a start.
February 9, 2013
The last time the pound “fell out of bed” was during 2007 and 2008, when it fell from an over-valued all time high of the sterling trade weighted index of 106.8045 on January 23rd 2007 to an under-valued all time low of 73.7560 on December 30th 2008.
After which it recovered over some months to roughly stabilise round about 80, and it’s been bumping along at that sort of level for nearly four years now.
Neither the careless attitude to retail price inflation nor QE seems to have had much impact on the external value of sterling over that period.
February 9, 2013
“part of the answer to instilling confidence and encouraging more growth.”
You are forgetting the huge “grey” population of savers & spenders. With low interest rates & government complicity in inflation – a.k.a. “Quantitve Easing” – you are removing money from the very people who would spend and thus encourage growth.
Seems a daft way to go about it and, yes, I declare an interest!
February 9, 2013
If, as you say, the value of money has fallen by 92% and now has reduced by another 8% does that mean our present pound is now worth nothing !!!! We all know why governments love inflation (not the population) and that is because it reduces our debt. The fact that most people’s savings (something we rely on to spend in the economy) are reducing by the day does not seem to register on their radar. No wonder the economy is so awful, people are not able to spend and the economy is not improved by governments but by the people of a country buying and selling goods and products made or produced in that country, not by pouring money into foreign economies by buying foreign goods.
February 9, 2013
Vanessa: “If, as you say, the value of money has fallen by 92% and now has reduced by another 8% does that mean our present pound is now worth nothing !!!!”
The devaluation of 92% is against the (for example) 1914 £ sterling. The new devaluation of 8% is against £ value today. But yes, the £ is worth nearly nothing.
Today £1 might get you two bars of chocolate.
in 1912 £1 may have kept a family modestly well fed for a week.
February 9, 2013
I don’t understand a lot of this, but I do see the devaluation of money and the devaluation of living standards in the quality of goods, particularly food. The supermarkets and processors are in a conspiracy. They like a long supply chain so they can hide behind it. If they have suspicions they don’t follow them up, they ‘turn a blind eye’. We are probably faced with the same kind of criminality and malpractice as we have seen in the banks.
We get smaller quantities for the same cost, and now horsemeat instead of beef. A clear case of deliberate lowering of standards and chasing down of their costs. What price did they pay for this ‘beef’? Someone somewhere must have thought there was something wrong. Are we to get sackings and resignations or will people get away with it as usual?
They lie to us. I don’t believe they didn’t know. They deceive us as to origins, they only pretend to care, they deceive us in their labelling. They are lazy and negligent in the checking, ‘its from the EU so it will be ok’. The EU has high standards after all, doesn’t it?
Another good reason to get out, make our own laws and enforce them.
February 9, 2013
I am hoping Mr Carney thinks that more monetary policy (QE) will do very little if nothing to foster any growth. It just allows Banks to make supernormal profits without having to lend money to those awful tradesmen out there.
Anyway, can I suggest some reading on modern economics? Go to Neil Wilson’s site “3spoken”. Read the Saturday 9th post and the older one he refers to in the first line, it will then make more sense. Then read (right col’ menu), “How the government’s super-platinum credit card works”. Then, “The reason for taxation, and what a deficit really is”.
Neil is one of the best explainers of modern economics in the UK. Looking up this page today I think there is confusion and some preferences need a little educating.
February 9, 2013
“Mr Carney the new Governor of the Bank of England may well wish to produce a monetary policy which fosters more growth.”
Mr Carney may well wish to do so, but by law his primary duty is to meet the inflation target set by Mr Osborne.
http://www.legislation.gov.uk/ukpga/1998/11/section/11
“11 Objectives.
In relation to monetary policy, the objectives of the Bank of England shall be –
(a) to maintain price stability, and
(b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”
http://www.legislation.gov.uk/ukpga/1998/11/section/12
“12 Specification of matters relevant to objectives.
(1) The Treasury may by notice in writing to the Bank specify for the purposes of section 11 –
(a) what price stability is to be taken to consist of, or
(b) what the economic policy of Her Majesty’s Government is to be taken to be.
(2) The Treasury shall specify under subsection (1) both of the matters mentioned there –
(a) before the end of the period of 7 days beginning with the day on which this Act comes into force, and
(b) at least once in every period of 12 months beginning on the anniversary of the day on which this Act comes into force.
(3) Where the Treasury give notice under this section they shall –
(a) publish the notice in such manner as they think fit, and
(b) lay a copy of it before Parliament.”
Personally I think it would be better if Mr Redwood and all the other MPs had the opportunity to debate and vote on whatever inflation target may be proposed by Mr Osborne, rather just being provided with a copy of his notice to the Bank after the event; but the main point is that as the law stands the definition of the inflation target will be in the hands of Mr Osborne, not those of Mr Carney, and likewise Mr Osborne will deserve blame if he continues to allow his legally binding inflation target to be breached without saying or doing anything about that.
February 9, 2013
This is an academic argument as the only difference that the rate of inflation makes is the speed to which our current socialist and corporatist based society collapses. We talk about dysfunctional banks and public sector entities and the decline of standards and values in society just to list a few and seek solutions individually to make them perform better. What we are doing is addressing symptoms piecemeal and not the cause. The clue to the cause is “our current socialist and corporatist based society” it is that which needs to be reformed abolished even after which many of the symptoms will go away of their own accord. Having swallowed the lefts promises of a better future by following their policies and practices we have put in place economic, social and political models that are destroying wealth creation, increasing authoritarianism and undermining competence and honesty. Addressing the cause is very tall order considering that the left have engineered an environment that most wish to perpetuate as at it’s heart is privilege and entitlement and not many will give that up voluntarily. The left however have overlooked a quite obvious unintended consequence of creating their societal models in that they are unsustainable when the nations and borrowed wealth runs out. The writing is on the wall as the wealth is bit by bit dissipating and no amount of tinkering with the symptoms afflicting our society will erase that writing only the collapse of what is a very bad system will do that.
February 9, 2013
The high inflation that is the striking characteristic of the UK economy delivers a double whammy to the economy. First it destroys savings. It then also discourages investment because the hurdle rate of return required by investors is also raised; that discourages new investment.
Assuming a long term cost of capital of c9-10%, the net present value of the cash flow expected in five or six years time is next to nothing. Add a premium for UK inflation vs say German inflation plus and extra 5% points for risk capital and the investment hurdle becomess a very high if not prohibitive 17-20%. No wonder there is a reluctance for foreign firms to invest in the UK. No wonder firms with cash are sitting on it. No wonder banks under pressure to lend are reluctant to do so. No wonder so many UK investments depend on tax payer funded subsidies (think renewable energy). In short the sums do not add up. Yet most politicians do not seem to understand the basic arithmetic. Ignorance is the order of the day. High inflation is the curse on the UK economy and the political class must bear a heavy responsibility for it.
February 12, 2013
“There is little evidence to support the idea that a higher rate of inflation produces more growth.”
How about history itself?
Average real GDP growth 1830-1914 2%
Average real GDP growth 1950-2010 2.5%
Yes, inflation have averaged 6% over the latter period, to 0% in the former period.
But that strikes me as some evidence regarding modern monetary arrangements.
I always think it funny how those on the right wax on about inflation over the years, but don’t actually refer to how many more of those pounds we actually have to spend.